chapter 14

6) The first section of a balance sheet lists: A) current and intangible assets. B) current liabilities. C) claims creditors have against the firm's assets payable within one year. D) the owner's equity in terms of initial capital invested and retained earnings.

A) current and intangible assets.

42) ________ publishes Annual Statement Studies, showing ratios and other financial data for over 750 different industrial, retail, and wholesale categories. A) Robert Morris Associates B) Boston Consulting Group C) Bank of America D) Dun and Bradstreet, Inc.

A) Robert Morris Associates

5) John is reviewing the company's costs and expenses against revenue for the last year. John is reviewing the firm's: A) balance sheet. B) income statement. C) sources and uses of funds statement. D) pro forma.

B) income statement.

31) ________ is one indication that a small business may be undercapitalized. A) A current ratio below 1:1 B) A quick ratio above 2:1 C) A debt-to-net worth ratio above 1:1 D) A net-sales-to-working capital ratio equal to 3:1

C) A debt-to-net worth ratio above 1:1

22) ________ ratios tell whether or not the small company will be able to meet its maturing obligations as they come due. A) Leverage B) Profitability C) Liquidity D) Operating

C) Liquidity

3) The ________ is built on the basic accounting equation: Assets = Liabilities + Owner's Equity. A) income statement B) sources and uses of funds statement C) balance sheet D) cash budget

C) balance sheet

44) Which of the following expenses would likely be classified "semi-variable"? A) Rent B) Electric utilities C) Wages D) Sales commissions

B) Electric utilities

4) The balance sheet is usually prepared on the ________ day of the month. A) first B) last C) 15th D) None of the above

B) last

49) ________ is (are) the value of the owner's investment in the business. A) Assets B) Liabilities C) Owner's Equity D) Profit

C) Owner's Equity

61) Which of the following is correct? A) Assets - Liabilities = Equity B) Assets - Equity = Liabilities C) Assets = Liabilities + Equity D) All of the above

D) All of the above

53) When comparing a company's ratios to industry standards, entrepreneurs should ask questions such as: A) Are the differences significant? B) Do I need to conduct ratio analysis? C) How do these ratios benefit me? D) All of the above

A) Are the differences significant?

18) ________ are those things that a business owns which have value. A) Assets B) Liabilities C) Owners' equities D) Liquidities

A) Assets

7) ________ are those items of value the business owns; ________ are those things the business owes. A) Assets; liabilities B) Liabilities; assets C) Ratios; equities D) Equities; liabilities

A) Assets; liabilities

60) What is the difference between price per unit and variable cost per unit? A) Contribution margin B) Contribution margin ratio C) Net operating income D) Contribution cost

A) Contribution margin

28) ________ ratios measure the financing supplied by business owners and that supplied by the firm's creditors. A) Leverage B) Profitability C) Liquidity D) Operating

A) Leverage

2) The ________ shows what assets the business owns and what claims creditors and owners have against those assets. A) balance sheet B) income statement C) sources and uses of funds statement D) pro forma

A) balance sheet

24) The ________ ratio is the liquidity ratio most commonly used as a measure of short-term solvency. A) working capital ratio B) quick C) debt-to-net worth D) turnover

A) working capital ratio

19) ________ are those things that a business owes; they represent creditors' claims against the business. A) Assets B) Liabilities C) Owners' equities D) Liquidities

B) Liabilities

39) ________ ratios indicate how efficiently the small firm is being managed. A) Liquidity B) Profitability C) Leverage D) Operating

B) Profitability

55) ________ measure how efficiently the firm is operating and offer information about its bottom line. A) Operating ratios B) Profitability ratios C) Balance Sheet ratios D) All of the above

B) Profitability ratios

23) The ________ ratio is a measure of the small company's ability to pay current debts from current assets. A) debt-to-net worth B) current C) quick D) debt-to-assets

B) current

25) As a general rule, financial analysts suggest that a small business maintain a(n) ________ ratio of at least 2:1. A) debt-to-net worth B) current C) inventory turnover D) quick

B) current

10) Dividing gross profit by net sales produces: A) operating expenses. B) gross profit margin. C) long-term profitability. D) gross profit flow.

B) gross profit margin.

50) Investors mainly want to see that entrepreneurs: A) have inflated the projections. B) have realistic expectations about income and expenses. C) will make profit immediately. D) All of the above

B) have realistic expectations about income and expenses.

26) When a company is forced into liquidation, owners are most likely to incur a loss when selling: A) accounts receivable. B) inventory. C) marketable securities. D) real estate.

B) inventory.

47) In the balance sheet, the current assets consist of: A) accounts payable. B) inventory. C) revenue. D) All of the above

B) inventory.

37) An above-average inventory turnover indicates that the business: A) has an illiquid inventory. B) is healthy, with a salable inventory. C) needs to review its pricing policies. D) has below-average performance and is facing bankruptcy if not corrected quickly.

B) is healthy, with a salable inventory.

13) Depreciation is: A) the difference between the total sources available to the owner and the total uses of those assets. B) listed as a source of funds because it is a noncash expense, deducted as a cost of doing business. C) the owner's total investment at the company's inception plus retained earnings. D) creditors' total claims against the firm's assets.

B) listed as a source of funds because it is a noncash expense, deducted as a cost of doing business.

38) The ________ ratio measures the small company's ability to generate sales in relation to its assets. A) net sales-to-working capital B) net sales-to-total assets C) average collection period D) average inventory turnover

B) net sales-to-total assets

58) In reviewing the company's balance sheet, Andy noticed that the total asset is stated as $5,500,000 and the total liability is $3,250,000. There is no paid-in capital or value for common stock. What are the company's retained earnings? A) Can't determine with the information given B) $8,750,000 C) $2,250,000 D) There are no retained earnings

C) $2,250,000

35) Which of the following would be a sign that a company is overextended in its debt? A) A low debt ratio compared to the industry average B) A debt-to-net worth ratio of 0.12 to 1 C) A times-interest-earned ratio that is far below the industry average D) A high inventory turnover ratio

C) A times-interest-earned ratio that is far below the industry average

48) In the balance sheet, intangible assets include items such as: A) goodwill. B) copyrights and patents. C) Both A and B D) accounts receivable.

C) Both A and B

62) In which statement are the account balances reversed to zero on a monthly basis? A) Balance sheet B) Cash flow statement C) Income statement D) All of the above

C) Income statement

56) ________ measure the financing supplied by the company's owners against that supplied by its creditors and serve as a gauge of the depth of a company's debt. A) Operating ratios B) Profitability ratios C) Leverage ratios D) Liquidity ratios

C) Leverage ratios

36) ________ ratios help a business owner evaluate the company's performance and indicate how effectively the business employs its resources. A) Liquidity B) Leverage C) Operating D) Profitability

C) Operating

29) Joe is examining the percentage of total funds in a business provided by its creditors. He is working with the ________ ratio. A) current B) quick C) debt D) turnover

C) debt

8) Bill is studying those expenses that contribute directly to manufacturing and distribution of goods. He's reviewing: A) cost of goods. B) general expenses. C) operating expenses. D) current liabilities.

C) operating expenses.

43) The break-even point occurs where: A) the firm's fixed expenses equal its variable expenses. B) the creditors' interest equals the owner's interest in the business. C) total revenue equals total expenses. D) assets and liabilities are equal on the balance sheet.

C) total revenue equals total expenses.

41) ________ publishes key business ratios for over 800 business categories. A) Robert Morris Associates B) Boston Consulting Group C) Bank of America D) Dun and Bradstreet, Inc.

D) Dun and Bradstreet, Inc.

57) ________ tell whether or not the small business will be able to meet its maturing obligations as they come due. A) Operating ratios B) Profitability ratios C) Leverage ratios D) Liquidity ratios

D) Liquidity ratios

45) Which of the following expenses would be considered "fixed"? A) Wages B) Raw materials C) Utilities D) Rent

D) Rent

15) One of the most important tasks facing an entrepreneur is: A) establishing a large enough reserve of capital. B) earning enough the first year to provide an adequate return on investment. C) the deferment of taxes. D) determining the funds needed for a company start-up.

D) determining the funds needed for a company start-up.

1) A pro forma financial statement means: A) looking at the current financial statement. B) looking at the past financial statement. C) preparing the current financial statement. D) preparing a projected financial statement.

D) preparing a projected financial statement.

20) A technique that allows the small business owner to perform financial analysis by understanding the relationship between two accounting elements is called: A) creating the pro forma. B) budgeting. C) break-even analysis. D) ratio analysis.

D) ratio analysis.

52) A ratio greater than ________ days would indicate poor collection procedures. A) 29 B) 40 C) 60 D) 90

B) 40

30) A high debt ratio: A) means that creditors provide a large percentage of the company's total financing. B) gives a small business more borrowing capacity. C) decreases the chances that creditors will lose money if the business is liquidated. D) decreases the creditor's interest in the business.

A) means that creditors provide a large percentage of the company's total financing.

40) The ________ ratio measures the owner's rate of return on the investment in the business. A) net profit-to-equity B) net profit on sales C) quick profit D) net sales-to-working capital

A) net profit-to-equity

54) Evaluates the firm's overall performance and show how effectively it is putting its resources to work. This is called: A) operating ratios. B) debt to equity ratio. C) accounts receivable turnover ratio. D) All of the above

A) operating ratios.

51) The most meaningful basis for comparing operating ratios is: A) other companies of similar size in the same industry. B) companies within the neighborhood. C) major corporations in the same industry. D) all publicly traded companies.

A) other companies of similar size in the same industry.

12) The ________ shows the change in the firm's working capital since the beginning of the year. A) balance sheet B) income statement C) pro forma D) statement of cash flows

D) statement of cash flows

11) The statement of cash flow: A) compares costs and expenses against a firm's sales. B) is built on the basic accounting equation: Assets = Liabilities + Capital. C) shows what assets the business owns and what claims creditors and owners have against those assets. D) shows changes in working capital by listing sources and uses of funds.

D) shows changes in working capital by listing sources and uses of funds.

17) The first step in creating the pro forma income statement is to: A) create a sales forecast. B) determine a reasonable salary and return on investment in the company. C) find published figures on the specific type of business in order to forecast sales. D) figure out operating costs and make a realistic sales estimate.

A) create a sales forecast.

33) The higher the ________ ratio, the lower the degree of protection afforded creditors and the closer creditors' interest approaches the owner's interest. A) debt-to-net worth B) quick C) asset turnover D) current

A) debt-to-net worth

16) When creating the pro forma income statement, the owner needs to translate the target profit into a net sales figure. To do this, the owner needs: A) to operate the business for one to two years to build a record. B) published statistics for his/her specific type of business. C) to divide actual net sales by the net profit projected. D) a sales forecast, the amount of retained earnings, and current depreciation on assets.

B) published statistics for his/her specific type of business.

27) The ________ ratio is a conservative measure of a firm's liquidity and shows the extent to which a firm's most liquid assets cover its current liabilities. A) current B) quick C) turnover D) net profit

B) quick

34) The ________ ratio is a measure of a company's ability to make the interest payments on its debt. A) debt-to-net worth B) times-interest-earned C) net sales-to-working capital D) net profit-to-equity

B) times-interest-earned

14) Projecting financial statements helps the small business owner to: A) track and monitor current expenses. B) transform business goals into reality. C) calculate his/her return on the amount invested in the company. D) measure liquidity of the firm.

B) transform business goals into reality.

21) What are the options for repairing a poor gross profit margin? A) Raise prices B) Cut manufacturing or purchasing costs C) Refuse orders with low profit margins D) All of the above

D) All of the above

46) The rule for the balance sheet is: A) Assets = Liabilities + Owner's Equity B) Assets - Liabilities = Owner's Equity C) Liabilities = Assets - Owner's Equity D) All of the above

D) All of the above

59) When comparing a company's ratios to industry standards, entrepreneurs should ask the which of the following questions: A) Is there a significant difference in my company's ratio and the industry average? B) Is the difference good or bad? C) What are the possible causes of this difference? What is the most likely cause? D) All of the above

D) All of the above

32) If Mary wants to compare what her small business owes to what it owns in order to assess her ability to meet obligations in case of liquidation, she needs to look at the ________ ratio. A) quick B) total debt turnover C) asset turnover D) debt-to-net worth

D) debt-to-net worth

9) The profit and loss statement is also referred as the ________. A) balance sheet B) statement of cash flows C) revenue statement D) income statement

D) income statement